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Using The Past To Discover What The Customer Will Want Next

I loved the article What’s your best innovation bet? by Melissa Schilling in this summer issue of the Harvard Business Review, as it has always been very hard to guess the future:

Image from Magda Kochanowicz

Melissa Schilling says that “By mapping a technology’s past, you can predict what future customers will want.” For that she explains her method:

1 – Identify the key dimensions

What she means here is to examine/analyse/determine the different aspects in which the technology has evolved, like on processing speed or on precision just to mention some typical dimensions, and to relate them to the need of users: how much has the technology satisfied that need? She gives a clear example with the recording industry, where the basic dimension for many years was the audio fidelity:

By the mid-1990s, both industries were eager to introduce a next-generation audio format. In 1996 Toshiba, Hitachi, Time Warner, and others formed a consortium to back a new technology, called DVD-Audio, that offered superior fidelity and surround sound. They hoped to do an end run around Sony and Philips, which owned the compact disc standard and extracted a licensing fee for every CD and player sold.

Sony and Philips, however, were not going to go down without a fight. They counterattacked with a new format they had jointly developed, Super Audio CD. Those in the music industry gave a collective groan; manufacturers, distributors, and consumers all stood to lose big if they bet on the wrong format. Nonetheless, Sony launched the first Super Audio players in late 1999; DVD-Audio players hit the market in mid-2000. A costly format war seemed inevitable.

You may be scratching your head at this point, wondering why you’ve never heard about this format war. What happened? MP3 happened. While the consumer electronics giants were pursuing new heights in audio fidelity, an algorithm that slightly depressed fidelity in exchange for reduced audio file size was taking off. Soon after the file-sharing platform Napster launched in 1999, consumers were downloading free music files by the millions, and Napster-like services were sprouting up like weeds.

If you wonder: ”who could have predicted the disruptive arrival of MP3? How could the consumer electronics giants have known that a format on a trajectory of ever-increasing fidelity would be overtaken by a technology with less fidelity?” Well, that’s just the method she’s presenting in this article, which first step is identifying the different dimensions at play.

For example, computers became faster and smaller in tandem; speed was one dimension, size another. Developments in any dimension come with specific costs and benefits and have measurable and changing utility for customers. Identifying the key dimensions of a technology’s progression is the first step in predicting its future.

To determine these dimensions, trace the technology’s evolution to date, starting as far back as possible. Consider what need the technology originally fulfilled, and then for each major change in its form and function, think about what fundamental elements were affected.

Tracing its [the recording industry] history reveals six dimensions that have been central to its development: desynchronization, cost, fidelity, music selection, portability, and customizability. Before the invention of the phonograph, people could hear music or a speech only when and where it was performed. When Thomas Edison and Alexander Graham Bell began working on their phonographs in the late 1800s, their primary objective was to desynchronize the time and place of a performance so that it could be heard anytime, anywhere. Edison’s device—a rotating cylinder covered in foil—was a remarkable achievement, but it was cumbersome, and making copies was difficult. Bell’s wax-covered cardboard cylinders, followed by Emile Berliner’s flat, disc-shaped records and, later, the development of magnetic tape, made it significantly easier to mass-produce recordings, lowering their cost while increasing the fidelity and selection of music available.

For decades, however, players were bulky and not particularly portable. It was not until the 1960s that eight-track tape cartridges dramatically increased the portability of recorded music, as players became common in automobiles. Cassette tapes rose to dominance in the 1970s, further enhancing portability but also offering, for the first time, customizability—the ability to create personalized playlists. Then, in 1982, Sony and Philips introduced the compact disc standard, which offered greater fidelity than cassette tapes and rapidly became the dominant format.

[…] I usually ask teams to agree on three to six key dimensions for their technology.

The recurring dimensions across industries are: ease of use, durability and cost. To foresee the future, it is worth also to imagine new dimensions worth exploring. A good tip to come up with those new aspects is to think big, no constraints, what could the customer want in an ideal world.

Folklore has it that Henry Ford once said, “If I had asked people what they wanted, they would have said faster horses.” If any car maker at the time had really probed people about exactly what their dream conveyance would provide, they probably would have said “instantaneous transportation.” Both consumer responses highlight that speed is a high-level dimension valued in transportation, but the latter helps us think more broadly about how it can be achieved. There are only limited ways to make horses go faster—but there are many ways to speed up transportation

2 – Locate your position

For each dimension, examine the value consumers are receiving for actual technology

This will help reveal where the greatest opportunity for improvement lies.

[..] For example, the history of audio formats suggests that the selection of music available has a concave parabolic utility curve: Utility increases as selection expands, but at a decreasing rate, and not indefinitely. When there’s little music to choose from, even a small increase in selection significantly enhances utility. Consider that when the first phonographs appeared, there were few recordings to play on them. As more became available, customers eagerly bought them, and the appeal of owning a player grew. Increasing selection even a little had a powerful impact on utility. Over the ensuing decades, selection grew exponentially, and the utility curve ultimately began to flatten; people still valued new releases, but each new recording added less additional value. Today digital music services like iTunes, Amazon Prime Music, and Spotify offer tens of millions of songs. With this virtually unlimited selection, most customers’ appetites are sated—and we are probably approaching the top of the curve.

Many dimensions have S-shaped curves: Below some threshold of performance there is no utility, but utility increases quickly above that threshold and then maxes out somewhere beyond that.

3 – Determine your focus

Once you know the dimensions along which your firm’s technology has (or can be) improved and where you are on the utility curves for those dimensions, it should be straightforward to identify where the most room for improvement exists. But it’s not enough to know that performance on a given dimension can be enhanced; you need to decide whether it should be. So first assess which of the dimensions you’ve identified are most important to customers. Then assess the cost and difficulty of addressing each dimension.

For example, of the four dimensions that have been central to automobile development—speed, cost, comfort, and safety—which do customers value most, and which are easiest or most cost-effective to address?

[..] Tata Motors’ experience with the Nano is instructive. The Nano was designed as an affordable car for drivers in India, so it needed to be cheap enough to compete with two-wheeled scooters. The manufacturer cut costs in several ways: The Nano had only a two-cylinder engine and few amenities—no radio, electric windows or locks, antilock brakes, power steering, or airbags. Its seats had a simple three-position recline, the windshield had a single wiper, and there was only one rearview mirror. In 2014, after the Nano received zero stars for safety in crash tests, analysts pointed out that adding airbags and making simple adjustments to the frame could significantly improve the car’s safety for less than $100 per vehicle. Tata took this under advisement—and placed its bets on comfort. All 2017 models include air-conditioning and power steering but not airbags.

Once you have identified the dimensions, the author suggests scoring these criteria to help you prioritize where to put the effort of innovation: how much users care about the dimension, room for improvement of the technology, and the cost involved in developing a new product on that dimension. See this example for blood-sugar monitoring devices:

DIMENSION

IMPORTANCE TO
CUSTOMERS (1–5 SCALE)

ROOM FOR
IMPROVEMENT (1–5 SCALE)

EASE OF
IMPROVEMENT (1–5 SCALE)

TOTAL
SCORE

RELIABILITY

5

1

1

7

COMFORT

4

4

3

11

COST

4

2

2

8

EASE OF USE

3

2

3

8

This matrix is very helpful to explicit the need to change a company’s traditional strategy:

It can also help overcome the bias and inertia that tend to keep an organization’s attention locked on technology dimensions that are less important to consumers than they once were.

Depending on your company’s situation (lack of cash, strong market position,..) you can weight some of the scoring to get your ‘personalised score. You can also use this method to analyse your competitors positioning and expected future products. Knowing their actual market strength and their potential future directions will make you see the best ‘bet’ for your company in an ever evolving industry.

The technology assessment exercise can help companies anticipate competitors’ moves. Because competitors may differ in their capabilities (making particular technology dimensions harder or easier for them to address), or because they may focus on different segments (influencing which dimensions seem most important or have the most room for improvement), they are likely to come up with different rankings for a given set of dimensions.

The great insight of the methodpresented in this article is not on getting the innovation idea, but more at a strategic level, on where it will be better to put the effort for Your company considering its Actual circumstances at this Present market (evolution of the industry and existing competence).

Perhaps more valuable is the big-picture perspective it can give managers—shedding new light on market dynamics and the larger-scale or longer-term opportunities before them. Only then will they be able to lead innovation in their industries rather than scramble to respond to it.